Suppose that a firm finds that its low-productivity workers have a marginal revenue product of $21,000 per year and that its high-productivity workers have a marginal revenue product of $35,000 per year. The cost of receiving a year's worth of higher education is $4,000 for a low-productivity worker and $3,200 for a high-productivity worker. (This cost can be thought of as repayment on loans that have been incurred in the process of obtaining the education.) The firm plans to offer a wage of $21,000 to workers without higher education and $35,000 to workers who attain a "certain" level of higher education.
a. If this firm uses this pair of wage offers and wishes to create a separating equilibrium using education as a separating device, how many years of education should be required to receive the higher wage?
b. Why does education work as a signal in this instance?
c. Does education increase the marginal productivity of workers in this instance?